The forex January effect

January tends to be a month in which investors are thinking about taking new positions and the potential for profits in the coming year. When investors reinitiate positions in the stock market, they may also need to buy U.S. dollars, which is why the greenback tends to have an upward bias against the Euro and Swiss franc in the first month of the year.

It illustrates the seasonality in the Euro/U.S. dollar pair (EUR/USD). Between 1997 and 2008, the Euro weakened against the U.S. dollar in January nine out of 12 years — 75 percent of the time. As of Jan. 14, seasonality has taken hold of the EUR/USD once again, with the currency pair falling more than 5.5 percent in the first 14 days of the month.

Excluding the price action in 2009, the EUR/USD has fallen 1.6 percent on average in the month of January. The biggest percentage decline basis was in 1997 when the currency pair fell 7.8 percent; the largest percentage rally occurred in 2006 when the pair rose 2.7 percent. Looking back more than 10 years to how the EUR/USD performed in the last 30 years (synthetic Euro prices were used prior to the Euro’s 1999 launch), we find the average loss for the currency pair in the month January was 1.2 percent.

Another strong case of seasonality appears in the U.S. dollar/Swiss franc pair (USD/CHF). Because the EUR/USD and USD/CHF frequently move in opposite directions because the U.S. dollar is the dominant driver of the two pairs, it is not surprising to see a similar seasonality during the month of January.

As was the case with the Euro, between 1997 and 2008 the U.S. dollar has rallied against the Swiss franc nine out of 12 years. As of mid January 2009, USD/CHF had appreciated in the first month of 2009, which means the seasonal trend has emerged 10 out of the past 13 years. There were three years in which the seasonal trend was overshadowed by other factors, but this is the same sort of vulnerability we see with technical analysis in general. However, it is undeniable the January seasonality in USD/CHF is strong as well. On average, USD/CHF has appreciated 1.5 percent in the first month of the year, with the largest rise in 1997 (6.1 percent) and the largest down move in 2008, when the pair fell 4.6 percent. Over the past 30 years, USD/CHF has, on average, appreciated 2 percent in January.